The Downsizing Decision

On June 24, 1965, a question that baffled millions of Americans was formally put to this country's auto makers in a letter from Representative Jonathan Bingham, of New York: What was the reason for "the failure of U.S. car manufacturers to meet the domestic market for small automobiles"?

In response, two of the auto makers reported that they had introduced compact cars in 1959, and then, for various reasons, had decided to go no further in manufacturing still smaller vehicles. James Roche, president of General Motors, said that in consequence of his company's action "the challenge of foreign imports . . . reached its peak in 1959." Chrysler, according to Harry Chesebrough, the vice-president for product planning and development, had had a certain success with its compact, the Plymouth Valiant, beginning in 1959, but had then chosen not to push development in the subcompact market. As a reason, Chesebrough alluded to possible competition from G.M. and Ford. "It seems certain that if one American manufacturer should successfully penetrate that portion of the market, the others would soon follow suit," he said. "In this event no one American company could hope to gain the necessary volume to justify the substantial investment required to enter the market." President Arjay Miller, of Ford—which had also introduced a compact car in 1959—said that his company had "decided in 1962 that market conditions were not ripe" for smaller cars. Mr. Miller explained, "American car buyers have clearly expressed their preference for less austere transportation." President Roy Abernethy, of American Motors, cited his company's original Rambler, a compact marketed since 1950, as evidence that his company had been "more deeply involved in the matter of car size than any U.S. company." He said that American had tried a subcompact car, the Metropolitan, in 1954, but that "the market was just not great enough to keep this small-car program going."

On October 15, 1973, the Arab states belonging to the Organization of Petroleum Exporting Countries, or opec, instituted limits on oil shipments to the United States, which lasted until May 18, 1974. Gasoline shortages had developed by Thanksgiving, and gas lines started to form. The problems attending the purchase of gasoline, and doubts about its future availability, soon affected the automobile market. Sales of imports from foreign-owned manufacturers, led by small cars featuring fuel economy, jumped by more than ten per cent, to almost fifteen per cent of the total American market. American Motors, with its compact, increased its sales by fifty per cent, to almost five per cent of the market. Chrysler and Ford, which had by this time marketed several smaller vehicles (among them the Dodge Dart and the Ford Pinto), held their shares of the market—roughly fifteen and twenty-five per cent, respectively, including cars manufactured abroad by them. But G.M., which had shown minimal interest in compacts after the early nineteen-sixties and still emphasized its line of gas guzzlers, weighing two tons or more and powered by huge eight-cylinder engines, suffered badly. Between the 1973 model year and the first quarter of 1974, its share of the domestic market dropped by almost fourteen per cent, at one point dipping below forty per cent of the total. "We were flat on our behinds," Richard C. Gerstenberg, who was the chairman of the company at the time, said in a recent interview. "People were wondering, Is the company going to make it?" But, as it happened, the market for big cars picked up in 1975, and G.M. enjoyed record earnings.

On January 16, 1979, the Shah of Iran was deposed. From April through September, gasoline was again in short supply, and gas lines formed anew. Once more, the structure of the car market was shaken. Imported cars, with small Japanese models leading the way, spurted to twenty per cent of United States sales in the first half of 1979, and to over twenty-five per cent in February of this year. But this time Chrysler (down below ten per cent of the market), Ford (at around seventeen per cent of the market), and American Motors (at only one and six-tenths per cent of the market) all lost ground. Added to the competition from below by the imports was a squeeze from the top. G.M. had, starting in 1974, put on the market smaller versions of every make in its line, from the Cadillac to the Chevrolet.

Then, in April, 1979, G.M. introduced a compact four-cylinder, front-wheel-drive vehicle, produced as the X-Car and marketed as the Chevrolet Citation, the Pontiac Phoenix, the Oldsmobile Omega, and the Buick Skylark. Thanks to the comprehensive reduction in size, G.M. more than held its own at the time of the second round of gas lines. Its share of the market for American-built cars soared to over sixty per cent—and set new monthly records, which, among other factors, put Ford in trouble and sent Chrysler running to the government for help. Even though hard hit by the recent slump, with first-quarter profits down eighty-eight per cent from a year ago, G.M. is the only major American car manufacturer in the black. In April, it has accounted for sixty-five per cent of sales of American-built cars. Robert Stempel, the general manager at Pontiac, told me, "These days, it's exciting to be at G.M."

I had visited Stempel in the course of an inquiry into how General Motors made what it calls the "decision to downsize." The quest led me, in late 1979 and early this year, to Detroit and to the executives of all the leading auto companies; to New York and to people in related businesses, especially finance; and to government officials in Washington and in Cambridge, Massachusetts, where the Department of Transportation maintains research facilities. Virtually everybody agreed that the downsizing decision was freighted with significance for G.M., and for the auto industry in this country and in the world at large. Joseph Downer, an executive vice-president of Atlantic Richfield, called it "a major event in industrial history." But nobody seemed altogether sure how it came about.

By way of introduction to the subject, I called on several executives of Detroit companies that service and supply the car manufacturers. From their comments, I gleaned the following picture of the auto industry:

To understand the industry, it is first necessary to understand Detroit. It is bounded by Canada and Lake St. Clair, so it did not have as much space for growth as was available to many other cities, and the suburbs had to stretch way out. Detroit is also unlike other cities—unlike New York or Chicago or Los Angeles, or even Cleveland or Pittsburgh—in that it doesn't provide a full range of services. It doesn't have a large independent legal or banking establishment. Auto manufacturing is practically everything in Detroit, and the auto executives, who for the most part live far out in the suburbs, tend to be concerned almost exclusively with cars.

Until the race riots of 1967, the industry was totally divorced from downtown. Since then, largely thanks to Henry Ford II, there has been a start at rebuilding the downtown—a big hotel-and-office complex called Renaissance Center, along the Detroit River. But, between Renaissance Center and the suburbs, there are large tracts of wasteland. The auto industry is not in close touch with the city or with the people who live there. It is not in touch with the people who live in other cities. The industry talks to the industry.

Relative youth also distinguishes the industry. It is less than a hundred years old. The founders were strong men. They left their imprint on the companies they started. Each company is different from the rest, and there's not a lot of rapport among them. Each is a universe unto itself.

At Ford, the family interest is still dominant. When Henry Ford II took over from his grandfather, just after the Second World War, he was in his twenties. He had to hire management, and he hired good management. He brought in Ernest Breech, from Bendix, and hired men known as the whiz kids—Charles Thornton, Robert McNamara, Arjay Miller, and J. Edward Lundy. For years and years, Ford ran the company through business-school types, such as McNamara, who was president from 1960 to 1961, and Arjay Miller, who was followed in 1968 by Semon (Bunkie) Knudsen, who came from G.M. But Henry Ford kept the ultimate power in his own hands. He played off the money men against the engineers, first favoring one group and then the other. That is how Lee Iacocca, who became president in 1970, came to the top. He was an engineer whose great triumph was the Ford Mustang, a sporty compact car. Then, in 1976, Ford had a heart ailment. In the hospital, he must have thought long and hard about the future of the company. After he came out, he decided he had to groom another business-school type—Philip Caldwell—for the top job. Iacocca protested, believing that he had earned the right to be heir apparent. Ford fired him. For most of the past five years, the company has been in turmoil at the top. It had always been strong in small cars, from the Model T onward, and it should have moved quickly into downsizing after the oil embargo, but it missed the boat. In 1974, it guessed wrong and decided not to downsize. Now Ford is paying the price.

Walter Chrysler and K. T. Keller, both brilliant engineers, were the men who made Chrysler. The company was always strong on advanced design. It led the way in hydraulic brakes, electronic ignition, and that kind of thing. In 1950, for reasons nobody seems to know—maybe just because he liked him—Keller decided to turn the company over to a production man, Lester L. (Tex) Colbert. Colbert had expansive ideas, and he began moving Chrysler into real estate and overseas purchases. To make those arrangements, he had to look to a firm of accountants, now known as Touche Ross. Colbert left, and Lynn Townsend, originally from Touche Ross, took over. He was eventually succeeded by a protégé, John Riccardo, also originally from Touche Ross. They did a lot of borrowing, and they saw the need to go to small cars. The company brought over some Ford people, including, finally, Iacocca, as president. But they didn't have the finances to swing a fast move to small cars. That, my informants said, was why the company is in trouble today.

One Detroit executive gave me a concise lecture on General Motors: "General Motors is the kind of institution whose like doesn't exist elsewhere in Western civilization. It is America's Japan. It is a marvellous structure of committees, put together by Alfred P. Sloan, who was chairman of the company from 1937 to 1956. At the top, there's the board of directors, headed by the chairman, Thomas A. Murphy. Directly under the chairman, there's the finance committee. That's the guardian of G.M.'s profits—the real powerhouse in the company. Then, there's also an executive committee, which reports to the president of the company, Elliott Estes, who reports to Murphy. The executive committee is responsible for operating policies—including changes in the company's products—and capital expenditures. It carries out those functions through a bunch of other committees, or policy groups—for administration, sales, engineering, merchandising, styling, and everything else. The committees are the company, and one of the ways you rise in the company is by being a committee man—preferably secretary of one of the committees. The people who succeed at G.M. generally come into the company very early, at low-level jobs. They don't have big ideas about rising to the top. They stick with the company, and eventually a few make it. To the outsider, they're not very impressive. They're not very interesting as people. They tend to talk in platitudes. All they know is the automobile industry. They mainly live in Bloomfield Hills, and they mainly play golf at the Bloomfield Hills Country Club. They even tend to look alike. But on the inside it's very different. They're smart. They work hard.

"The decision to downsize is a prime example," he went on. "It may look obvious to outsiders, but it wasn't obvious to the auto industry—especially not to G.M. To begin with, the auto companies aren't innovators. Maybe there were some big changes in car manufacture in the early years—moving up from bicycles to open cars with metal bodies built over wooden frames on steel chassis, and then to hardtops with metal frames. But it isn't like space or computers, or even the telephone business. The premium hasn't been on technological change. After about 1920, the premium was on mass production—on doing the same thing over and over again, always at a little less cost if possible. The penny-pinchers rose in the auto industry—especially at G.M. Even when there were changes, they tended not to be changes in the basic product. They were changes in style and appearance, changes in fashion.

"Prices and profits were built around mass production of the basic unit, with changes in the trimmings. The difference in the cost of the materials and labor that go into producing the basic Chevy and the basic Cadillac is not all that great. But G.M. puts all kinds of special luxury features on the Cadillac. It makes money on each one of the features. So the company makes much more on a Cadillac than on a Chevy. Shrinking the size of cars came hard, because it implied cutting back on the most profitable models."

For General Motors, he concluded, it was particularly tough: "G.M. has models in every price range. If it changed Pontiac, that might hurt Chevy. If it changed the Olds, that might damage the Buick. So it had to change the whole line, and it had to change against the direction of everything it had been telling itself and telling the customer. The old message was more for more. Bigger is better. It had to change to smaller is better. Less for more. That was risky."

Nonetheless, it appeared that when the G.M. managers decided to change they went all the way. They invested twenty billion dollars in downsizing between 1974 and 1980. They moved fast, and with a singleness of purpose that astonished all the outside executives I consulted. Not one professed to know how G.M. had done it.

Henry Ford II, whom I saw at the company headquarters in Dearborn just before he stepped down as chief executive, in October of 1979, tended to confirm that analysis. He obviously belongs to a breed apart from the ordinary auto executive. Instead of the uniform white broadcloth shirt, he was wearing a blue button-down oxford, and his suit had the unpadded shoulders and narrow lapels that are said to distinguish Ivy Leaguers. Far more than any other auto executive, he was plainspoken—direct to the point of being blunt. He said that the President and Congress and the country were "confused" in thinking that only the Europeans and the Japanese knew how to make small cars well. He said that Ford had been selling cars around the world since 1904. In Europe, he said, Ford was (after Volkswagen and Fiat) the third-biggest seller of cars. The company was also doing very well in Mexico, Venezuela, Brazil, and Argentina. The Ford Fiesta was as good as any small car built. He pointed out that while Ford was losing money in the United States, it was making profits from overseas operations. "The profits from abroad supply us with funds we need for investment here," he said.

There was need for investment on a colossal scale in this country, Ford asserted, because the market had been transformed. "We'd like to be able to sell some middle-range cars," he said. "We still hope there will be room for buyers to make some choices. But there's no chance the market will bounce back. It's a matter of fuel supply. The future belongs to more fuel-efficient cars—smaller and less powerful."

He acknowledged that Ford was behind G.M. in downsizing. It would not catch up with the X-Cars until later this year, and it would draw abreast of the Cadillac Seville only in 1981. He said that Ford had been moving toward smaller cars in this country, but in a gradual way. The slow approach had paid off in 1976, 1977, and 1978, when Americans still wanted big, roomy cars. "Iran made things fall apart," he said. Then he asked ruefully, as if he weren't altogether sure that the question was rhetorical, "But who could have predicted Iran?"

At Chrysler headquarters, in Highland Park, north of Detroit, the atmosphere called to mind a man looking for a minute in which to have a nervous breakdown. Appointments were made and unmade. Executives buzzed off to Washington for meetings with government officials, to New York to see the bankers, or sometimes to Europe for huddles with foreign auto manufacturers. In mid-September of last year, at a press briefing on the 1980 models, Chrysler previewed a television commercial that featured a well-known actor. Later, Lee Iacocca was asked about the commercial, and he indicated that it might eventually emerge in somewhat different form. It did—with Iacocca himself replacing the actor.

The new boss at Chrysler is a big, attractive man, who wears mod suits and speaks in a husky voice. His tone is slightly tough, and when he speaks of "the Feds" his manner summons to mind a picture of a G-man in the nineteen-thirties as played by, say, James Cagney, rather than the Secretary of the Treasury as played by G. William Miller. Iacocca led off with me by talking of the past. "When the 1973 oil boycott came, we considered it a blip," he said. "We figured the market would come back in six months, and it did. I've spent all my life making small cars and styling small cars. We could've put front-wheel drive in the Mustang and taken off five hundred pounds. The public didn't want it. But the second energy crisis didn't just tilt the market. It toppled it. We have to keelhaul the whole industry. If anybody tells you he can plan ahead for the next two years, he's nuts."

Iacocca pointed out that, contrary to widespread popular belief, Chrysler was, by this time, ahead of G.M. and Ford when it came to selling small cars. He cited the Omni and the Horizon—two front-wheel-drive, four-cylinder subcompacts that, since their introduction, in January, 1978, Chrysler had been selling as fast as they came off the assembly lines. He claimed that if the gas pinch had held off until 1981 Chrysler would have had a dominant position in the small-car market. As it was, G.M. still sold "seventy per cent of the gas guzzlers, Ford fifty per cent, and Chrysler thirty per cent."

To stay alive, Chrysler had had to go full speed with a program to downsize cars and modernize plants. The cost of these changes, Iacocca said, "came to a hundred million dollars a month." That's why Chrysler went to the federal government to tide the company over the present period. Without such help, Iacocca claimed, the burden of reëquipping the industry would break Chrysler, and maybe it would turn out to break Ford. He said he could envisage a period of chaos in the domestic market, which "in a few short years" would leave General Motors as the sole survivor.

Nothing about G.M. belies that prediction. It is, after Exxon, which took the lead away from it last year, the nation's second-largest industrial corporation, with eight hundred and fifty thousand employees in thirty-five countries; one million two hundred and thirty-seven thousand stockholders; sixty-six billion dollars in sales and nearly three billion dollars in profits in 1979; and thirty-two billion dollars in assets. Its headquarters are a fifteen-story, block-size limestone pile, designed by Albert Kahn, in 1919, on West Grand Boulevard, a few miles north of the general downtown district of Detroit. The fourteenth floor, where the top executives have their offices and hold many of their conferences and eat most of their meals, smacks of sturdier days—a time when business was business and businessmen were businessmen. The offices are relatively small, the furnishings utilitarian rather than rich, the secretaries notable for looking efficient rather than beautiful. A single corridor connects all the executive offices, and the view tends to be inward rather than outward. A glass door, worked by remote control from a reception desk, separates the executive corridor from the rest of the floor. The atmosphere inside that door is dignified and still—like that of a church. The impression is of a stability that outlasts time.

My first call at G.M. was on Elliott Estes, the president of the company. Pete Estes, as everybody calls him, is the very model of a G.M. engineer. He was born in Michigan and educated at the General Motors Institute, a management-cum-vocational school that the company maintains in Flint. He rose through the ranks, first at Pontiac and then at Chevrolet, before moving over to the fourteenth floor, in 1969, and he became president in 1974. He wears a mustache that makes him look slightly like Mandrake the Magician, but otherwise comes on as a straightforward fellow with an open, ebullient manner. "NOTHING GREAT WAS EVER ACHIEVED WITHOUT ENTHUSIASM," says a sign on his otherwise uncluttered desk.

I had interviewed Estes for television during the recession of 1974-75, when there was a big question as to whether G.M. would join Ford and Chrysler in giving rebates to move cars out of inventory. During the interview, which took place in the morning for broadcast that evening, Estes repeatedly evaded questions about rebates. Around midday, he called to say he'd like to do the interview over again. We did, and it developed that in the course of the day G.M. had announced a decision to accord the rebates. Estes knew that the decision was going to be made, but he wouldn't say so, even for later broadcast, until the decision had actually been announced. Still, he began the more recent interview at G.M. by reminding me in a breezy fashion of the rebates episode. Without any prompting, he then began to talk openly about his approach to the building of smaller cars. He said that he had begun his career at G.M. working for Charles Kettering, the famous inventor, who developed the self-starter. "Back in 1934, Kettering kept telling us that the world would soon run out of oil," Estes said. "I waited ten years, and the world didn't run out of oil. I waited twenty-five years, and the world didn't run out of oil. In fact, there was more oil than ever before, and a big thing in my career was developing a high-compression engine. So I guess I kind of stopped waiting."

Estes continued, "The consumer is the gut issue. We first try to take care of the customer for G.M. cars. We try to hold him. We try to make G.M. immune to losing customers. Now, you have to remember that the automobile is the most postponable consumer purchase there is. Our customer doesn't have to buy a car tomorrow, or next week, or even in the next four years. With a paint job, a new battery, and a little fixing, his car can last six or seven years. So our business stops as soon as the customer loses confidence—whether it's because of a recession, or the illness of the President, or a product he doesn't like. For us, the confidence of the consumer is the whole ballgame. Over the years, we made several passes at going to smaller cars. We tried it with our compacts in 1959. We thought the Corvair, the smallest of the lot, was timely and appealing, but it was a victim of bad publicity. We also brought out some more conventional smaller cars—the Pontiac Tempest, the Buick Special, and the Olds F-85. Those cars were too high and too narrow. The customers didn't like them. It was a disastrous experiment. By 1965, we had to sell the engine plant we were using for those cars. In the next few years, we discovered that the wide-track V-8 Pontiac was our best seller. We learned that the more power we put in a car the more cars we sold. History taught us that big was better."

In 1972, Estes recalled, various studies of the coming energy shortage had caused G.M. to begin planning for a reduction in car size. "We started to do it slowly and systematically—first, by taking four hundred pounds out of each car," he said. "Then, in December, 1973, during the oil embargo, we upped that to a thousand pounds per car. That was the heart of what we call the downsizing decision."

In looking over the past, Estes felt that what had been done so far was relatively easy. He said that the downsizing up to then had been mainly a matter of reducing weight with lighter materials and smaller frames. The hard things were coming up: front-wheel drives, aluminum engines, new kinds of power systems—maybe diesel cars, maybe battery cars. "The next five years are going to be the most innovative in our history," he said.

I asked him how he judged G.M.'s downsizing performance as a whole. Estes said, "I think of the energy shortages as hiccups. The first hiccup caught us by surprise, and you can’t expect us to respond to every hiccup. The response to the second hiccup was better. Maybe there will have to be a third hiccup."

After seeing Estes, I moved down the corridor to the corner office assigned to the chairman of the board of G.M., Thomas Murphy. Like most of his predecessors as chairman, including Alfred Sloan, Murphy rose through the finance side of the company, becoming vice-chairman in 1972 and chairman in 1974. Until recently, he described himself in Who's Who as a "financial executive," and, indeed, he looks like a bookkeeper—tall, thin, with an austere face, in which severe eyes peer unblinkingly from behind thick glasses. Even by G.M. standards, his appetite for work is huge. "He's the only one I know who reads all the paper the company generates,” a colleague confided. "Seven days a week, eighteen hours a day, he reads those reports." Murphy's desk testifies to his diligence. Not only is it piled high with letters, reports, and bound folders but various signs advertise the condition. "BLESS THIS MESS," one reads. Another says, "A CLUTTERED DESK . . . THE MARK OF GENIUS."

I had interviewed Murphy early last year, in the course of a general reconnaissance of the auto industry. At that time, he had talked about relation between government and business. He had warned against any bail-out of Chrysler by the government, on the ground that it would compromise the principle of free competition. As he talked, he had become more and more intense, pounding his palm with his fist, and walking up and down his office. He seemed to me a little like Uncle Sam in the posters for enlistment in the armed forces, and I came away feeling that in the matter of free enterprise I was something of a slacker.

To avoid another lecture, I asked Murphy to tell me as briefly and directly as possible about G.M.'s decision to downsize. He plunged into the subject immediately. But as he spoke there was curious backing and filling. At times, he was peppy. At other times, he checked his enthusiasm, as if he were afraid it would bring down on his head the wrath of some corporate god. He began with a reference to the American love for big cars in the nineteen-sixties. He said that G.M. had launched several small cars but that customer demand had caused each model to get bigger year by year. "When the oil embargo began in 1973, we had a heavy preponderance of cars in the upper echelons," he said. "Our fleet average was twelve miles per gallon, as against fourteen m.p.g. for the competition. We realized that the availability of gas would become a problem for us. We still expected a big demand for the big cars. But we also felt there would be a strong demand for the small cars. We said to ourselves, 'We've got a job to do.' Late in the year, we took two basic decisions. First, we decided to produce the Chevette in the U.S. That was a small car designed in Germany by our subsidiary there, Adam Opel A.G., which we had been producing in Brazil to beat the Volkswagen there. Our decision was to bring it out in the United States as a small Chevy within eighteen months. Then we decided to produce the small Cadillac—the Seville. In other words, we moved in both ends of the market, where the imports were strongest. We moved against the Mercedes at the top and against the Volkswagen and the Honda at the bottom."

I asked Murphy exactly when that decision had been made and in what circumstances. He said that making the decision had been "relatively easy—a matter of general consensus." To answer the question about timing, he rose from his desk and circled back of me to a bookcase full of documents. He plucked one out, came back to his desk, and began leafing through it. Then, pointing to the sheets he held in his hand, he said, "This is an official schedule of major actions by G.M. It says here that the executive committee approved the K-Car decision (that's the Seville) on January 23, 1974, and the T-Car (that's the Chevette) on the same day. But I know that's wrong. We didn't make the decision in the executive committee. We made it in the engineering-policy group. It was on December 23rd."

A copy of the chronology that Murphy had consulted was later made available to me by Philip Workman, of the G.M. public-relations staff, who accompanied me to almost all my interviews with company executives. As Murphy had indicated, the official chronology recorded that the decisions on the Cadillac Seville and the Chevette were made by the executive committee on January 23, 1974. The sheet made no reference to the meeting at which, Murphy said, the decision had actually been made—a meeting of the engineering-policy group on December 23, 1973. It turned out, moreover, that December 23, 1973, was the Sunday before Christmas. Even G.M. executives don't have major policy huddles on the Sunday before Christmas. There had, in fact, been no high-level meetings at G.M. on the date described by the chairman of the board as D-Day. The public-relations staff was baffled. But I was assured that everything would be set straight when I saw the man who had been chairman at the time, Richard Gerstenberg.

Gerstenberg, the chairman of G.M. from 1972 through 1974, when he retired, is a square-faced man of immaculate neatness in tailoring, bearing, and speech, who looks surprisingly young for his age, which is three score and ten. He made an appointment with me for 9 a.m. on a Monday in a public-relations office of the G.M. Building, and arrived with notes based on talks with Murphy and others about my previous interviews. Before going into the particulars of the move to smaller cars, he discussed in detail the recent history of G.M. "To the extent that I had anything to do with the decisions," he said, "it was the result of a lot of input and pressure that I had from several sources that were maybe outsiders more than insiders with respect to the corporation." He said that until the nineteen-sixties G.M. had a board of directors composed "largely of insiders." Thereafter, the company came under pressure from Ralph Nader and other critics for not being alert to broad public interests. Frederic Donner, who was chairman at the time, opened the board to people from outside G.M. By the time Donner quit as chairman, in 1967, "half were outsiders," Gerstenberg said. "That was a dramatic change for General Motors."

The outsiders on the board pushed G.M. to create a wide range of new activities. A public-policy committee was established, and a science-advisory committee, and a corporate-directions group, for long-term planning. In one way or another, each of these raised the subject of energy. "All through this," Gerstenberg recalled, "those public-policy guys were giving me a hard time: 'What are you doing about more competition for the Mercedes?' ” Minutes of the corporate-directions group showed that at the first meeting the first item on the agenda was a discussion of small cars. The science-advisory committee led Gerstenberg into meetings with academic figures and oil-company executives on energy problems. In July of 1972, G.M. set up an energy task force, under the company treasurer, David Collier. That same month, the company decided to build a sporty subcompact Chevy, the Monza (not to be confused with an earlier Corvair Monza). In April of 1973, it adopted a slow and modest program for reducing the bulk of its full-sized Chevies, Buicks, Pontiacs, and Oldsmobiles. Around the same time, the energy task force began reporting to various G.M. committees that there was a serious possibility of a gas shortage. "When the embargo came," Gerstenberg said, "I was aware that we had to do something drastic, and that we had to do it right away."

At that point, Gerstenberg turned to the decisions taken in December of 1973. His notes showed that there had been two meetings—not one, as Murphy had remembered it. He said that the meetings involved a score of men in the engineering-policy group. They were held at the design studio in the G.M. Technical Center, in suburban Warren, just north of Detroit, and the object was to survey models for future years. Decisions had to be made at that time because financing for the new models was to be approved at a board meeting in January of 1974, which would take place against the background of a deepening recession. The basic decisions made were to produce a small Chevrolet (the Chevette) and a reduced-size Cadillac (the Seville), and to introduce into the Buick, Olds, and Pontiac lines smaller models based on the Chevrolet Monza.

Downsizing in general was one subject at issue. "There were some who weren't all that certain that an embargo was going to last, and if it blew over, hell, we might have spent a pile of money and not been able to sell the cars," Gerstenberg said. "There were others who said, 'Get those small cars. We need them and our competition's got them.' ” Gerstenberg himself came down on the side of the smaller cars. "I don't want to make this sound boastful, I hope you'll understand," he told me, with a diffidence characteristic of G.M. executives when they tall about themselves as distinct from their organization. "But I said, 'The need right now is for more small cars.' And I said we had to do something of a short-term nature and then we had to do something of a long-term nature. And for the short term we had to find some way to get a smaller car for every one of our car divisions in the shortest possible time."

About the subcompact Chevrolet, there was little argument. It was agreed that the Chevette, designed in Germany and produced in Brazil, would be brought to the United States and "put into production as fast as we could." There was more argument about reducing the size of the Buick Oldsmobiles, and Pontiacs by fitting some of them into the mold of the Chevrolet Monza. According to Gerstenberg, some people said, "Hell, they're medium-sized cars. Why give the Monza to them? It ought to be retained for Chevrolet." He explained me, "That was Chevrolet's market. The low end."

Cadillac provided the occasion for the key fight. According to Gerstenberg, the Cadillac engineers had served up a project for a brand-new compact model: "a hell of an automobile, front-wheel drive—geez, it was something." The design staff had come up with an intermediate version of the Cadillac with a conventional drive. Gerstenberg took soundings on how long it would take to get a front-wheel-drive Cadillac into production. He decided to take the compact design submitted by the Cadillac people, but with the conventional drive proposed by the design people. "I said, 'Well, hell, based on your time element to get a front drive, there's only one way to go, and that's to get the smallest one as quickly as we can get it.' So that's about what we decided right there—the Chevette, the Monza for Buick, Oldsmobile, and Pontiac, and the smaller Cadillac for Cadillac."

Gerstenberg’s account, I learned from a subsequent check with other G.M. officials present at the meetings—including one who had taken notes—was just as flawed as that given by Murphy. For one thing, Gerstenberg was wrong about the committee that made things happen. The action began on the morning of December 19, 1973, with a meeting of the engineering-policy group, including some thirty executives and staff people, in the library conference room of the design-staff building in the technical center. That meeting ended in midmorning. Afterward, the six top executives who made up the G.M. executive committee met informally in the same room to consider the Cadillac problem. The executive-committee members subsequently moved over to an auditorium adjacent to the design-staff building, where they reviewed various models. They lunched together. They also met two days later—on December 21, 1973—at 8 a.m., in a small conference room off the design center. Those meetings were attended by the full executive committee: Edward Cole, president of the corporation and chairman of the executive committee; Gerstenberg, then chairman of the corporation; Murphy, then vice-chairman of the corporation; and three executive vice-presidents—Estes for operations, Oscar Lundin for finance, and Richard Terrell for the car, truck, body, and assembly divisions.

That committee meeting made the basic downsizing decisions. Unanimously. For Gerstenberg's story was wrong in another respect. Consensus didn't just happen. On the morning of December 19th, after the session of the engineering-policy group, the executive committee met with two top Cadillac executives—General Manager Robert Lund and Chief Engineer Robert Templin. Lund and Templin were vigorously opposed to the proposal of the design staff that the new Cadillac be an intermediate-sized vehicle with rear-wheel drive. They insisted on the smaller car with front-wheel drive, because they felt that front-wheel drive was the future, and that Cadillac, as G.M.'s quality car, ought to show the way. Gerstenberg, while opposed to the design-staff model, was concerned that producing a front-wheel-drive car would take too long. But he did not want to simply overrule the Cadillac executives. So, after the meeting on the morning of the nineteenth, Gerstenberg and Cole spent the afternoon with Lund. In the course of their discussions, the Cadillac executive agreed to postpone the demand for the front-wheel drive. On December 21st, when the executive committee made the final decision, the Cadillac men were for the smaller car with the rear-wheel drive. Everybody who counted was on board for the Seville. Consensus had been negotiated—and the latest model of the Seville has a front-wheel drive.

"That doesn't sound like industry. It sounds like government," an official in Washington said to me when he heard my account. He heard it because the repeated failure of G.M. to get its own story straight drove me back to officials in the transport field, both in Washington and in Cambridge, and to financial analysts in New York for some outside explanation. Forgetfulness, all agreed, was undoubtedly a factor. It probably accounted for not knowing exact dates and exact names of committees and the exact decision as to which car was built by which division. Tactics also seemed to be involved. Murphy and Estes are active executives, with full schedules and an ongoing round of decisions. They saved time for themselves, and avoided controversy, and they made it seem that Gerstenberg had been the driving force. In addition, however, both the government officials and the financial experts I talked to insisted that G.M. was so huge that it was difficult for any individual boss to have a fully detailed view of company decisions, and that it was so self-absorbed as to be blind to the role of government.

An official of the Department of Transportation said, "Nobody at G.M. could tell you exactly how the downsizing decision was made because nobody knows. The fact is that G.M. didn’t make the decision by itself. The government helped the company. The government forced G.M. to take a critical look at its cars—first by setting standards for safety, then by setting standards for cleaner air, and, finally, by setting miles-per-gallon standards for fuel efficiency. Without the miles-per-gallon standards, G.M. would never have downsized the way it did. But the G.M. executives fought the standards every step of the way. Even now, they're so tied up in their ideology that they can't admit what the government did for them."

That view was endorsed by a Washington lawyer who works for the auto industry. After hearing my account, he wrote me:

**{: .break one} ** The Arab oil embargo did indeed cause a "hiccup" on the demand graph; consumer interest in small cars jumped but then slid back. But only when the fuel economy standards were enacted in 1975 did a comprehensive approach to downsizing begin. In the post-embargo period, the car companies were convinced (probably rightly so) that consumers were still primarily interested in large cars. Nevertheless, they were confronted with the government standards. Downsizing was the way out; accommodate consumer demand for large cars and meet the early government standards that weren't all that tough. The tougher phase of standards (beginning next year) calls not just for downsizing but for new cars. In 1978, the industry was really thinking of whether there was a chance to change the standards, because consumer demand wouldn't allow them to meet the standards. It wasn't only [Jimmy Carter's] chestnuts that the Ayatollah pulled. By mid-'79, six months after he took over, the market was way ahead of the standards. **

Partial support for that contention emerged from a review of my notes. Gerstenberg, for example, had mentioned fuel-efficiency standards in a way that suggested they were acceptable because they supplemented what G.M. had decided to do in response to the market. Indeed, he moved almost imperceptibly from an allusion to the government miles-per-gallon standards to a sales pitch for one of the downsized cars. He said, "The standards have forced us to do something we're doing much better than we thought we ever could. And the best illustration I can think of—have you ever driven one of those X-Cars?"

General Motors executives who were more closely connected with production were much more explicit, and even enthusiastic, about working with government. Robert Stempel, of Pontiac, a big, beaming forty-six-year-old engineer, presents a case in point. Stempel had served as special assistant to Edward Cole from June, 1973, to September, 1974. I lunched with Stempel in his office at the Pontiac plant at the urging of the G.M. public-relations staff. Cole had retired in 1974, grumbling. He said, "The fun is gone. . . . I wouldn't go into the automobile business again." It developed that Stempel knew little about the downsizing decision, and it occurred to me that my meeting with him had been arranged in order to prove that Cole's protégés nursed no bitter feelings. Whatever the reason for the meeting, Stempel was full of interesting lore about the catalytic converter that G.M. had developed to clean up auto emissions. He said that Cole had personally worked on the gadget. He not only acknowledged that the catalytic converter had been developed under government pressure, he also pointed to the clear blue skies outside the window and said it didn't use to be that way, because the Pontiac foundry had spewed out heavy smoke until pollution-control equipment was installed. At one point, he said, "We're proud at General Motors to be serving not only the company but the country. We like better products, and a healthy atmosphere—for ourselves and for our children. It's an especially good feeling for a lot of the younger engineers who have been pressing for these things for years."

The present top brass at G.M., while not nearly so enthusiastic, is not blind to the increased role of government. Chairman Murphy may be a hard-line exponent of free enterprise in his preaching. Not in his practice. Since June of 1978, he has been chairman of the Business Roundtable, the major organ for coöperation between the government and the business community. Along with Reginald Jones, of General Electric, and Irving Shapiro, of du Pont, a co-chairman and past chairman, respectively, of the Roundtable, Murphy has been a leading supporter of the Carter Administration's effort to restrain wages and prices. The Murphy era at G.M., moreover, has featured a reshaping of practices and structures in ways that make the corporation more responsive to the government and its concerns. In a follow-up interview that I had with Murphy in Washington after making the rounds of government officials, I asked him directly how he would summarize the changes that marked his stewardship of G.M.

He said, "I really don't think we've changed. I think the scene in which we are a part has been shifting. And you have to, you might say, move with the times and move with the scene. At the time I came with the corporation, it was a different environment as far as business was concerned. I think businessmen perceived themselves as being part of the business scene but not part of the broader industry and government total-society scene. I think there has been a draw and a pull to which business people have to respond. And I'd say we are more outward-looking, and I hope more in relation to the society at large today, than we've been in the past."

In that respect, probably the most important new departure at G.M. has been the institution of the project center. In the past, when G.M. followed the market, and only the market, it used to make decisions slowly, almost inch by inch. Innovations—power steering, for example, or power brakes—were introduced over a long period of time, with each car division moving at its own pace. But government-mandated actions don't allow for decisions on a slow curve, with Pontiac leading in one feature, and then Buick taking over, and then Cadillac and Oldsmobile. When Congress enacts a law, the new standards apply to all models, and they must be put into effect by a certain date. Decisions, instead of being made along a graded curve, have to follow a stair-step pattern.

G.M. made its first accommodation to that change in developing the catalytic converter. The company did not let each automotive division go its own way. Instead, it established a special unit, named after a similar organ developed by government in the space program—the project center. The project center drew talent from all the automotive units, but a single engineer, who reported directly to the fourteenth floor, kept track of progress. The catalytic converter, which the first project center developed, was made available to all G.M. cars, from the Chevrolet to the Cadillac. Thereafter, separate project centers were established to downsize big cars, intermediate cars, and sports cars. The X-Car was also developed in a project center. Now G.M. is using the project-center approach to develop a battery-driven car.

The structure of management on the fourteenth floor has also been transformed to meet the need for adjustment to more rapid change, across a wider band of concern. Under Murphy and Estes, there are four executive vice-presidents, in charge of different groups of G.M. activities. Two are traditional: the executive vice-president for finance, Roger Smith, who will, if the usual bias toward the financial side holds good, succeed Murphy at the end of this year; and the executive vice-president for North American car and truck operations, F. James McDonald, who has a good chance to succeed Estes. But two are new. There is an executive vice-president, Reuben Jensen, in charge of the steadily expanding amount of business that G.M. does in producing common components (engines, brakes, batteries, etc.) for its cars, and an executive vice-president for overseas operations, Howard Kehrl.

The overseas emphasis points toward what is probably the most portentous of all the changes flowing from the downsizing decision. For a long time, it has been apparent that the greatest potential market for car sales is outside the United States. In this country, the ratio of people to cars is roughly two to one—around two hundred and twenty million people to about a hundred and ten million cars. In Western Europe, the figure is four persons per car; in Japan, six persons per car; in Latin America, eighteen persons per car; in Asia and Africa, ninety persons per car. So, while the American market is close to the saturation point, the pickings abroad are rich.

In the past, G.M. paid little attention to those possibilities—it behaved like an American company with foreign subsidiaries, not a multinational corporation based in the United States. While it did twice as much American business as Ford in 1978, for example, it sold less than Ford did outside North America. But downsizing gave G.M. much more access to the foreign markets. Gerstenberg said, "Until the time we built small cars here, our cars in this country were generally much bigger than the cars built abroad. We were almost forced to have smaller cars abroad. While we exported some of our cars, we never did export them in great volume, because we just didn't make that kind of a car. Today, we've got cars that are competitive with the cars they make. Also, cost has come to be a much bigger factor. It just costs you so goddam much more to make a car that you can save money by having one design for the whole world."

These opportunities were not lost on Murphy and Estes. Both had responsibilities for international business before coming to the top—Murphy as vice-chairman, Estes as executive vice-president for operations. "Frankly," Estes once said, "I hadn't liked the idea of G.M. being just another of the competitors in the pack overseas." So, not long after he and Murphy took over, the overseas operation was given increased status, under a group vice-president. The overseas staff was moved from New York, where it had been on its own, to Detroit, where it was merged with the central staff. Separate divisions, each headed by a vice-president, were created for Latin America, Asia, Germany, the rest of Europe, and Britain (where G.M. manufactures and sells as Vauxhall). During 1979, G.M. announced expansion of its existing plants or construction of new ones in Mexico, Brazil, and Europe. As for the future, the company's top project is the "world car"—a four- or five-passenger compact that can be assembled in several countries from components made in many countries, and can be sold anywhere in the world.

G.M.'s new quest for international markets carries heavy implications for the structure of the domestic automobile industry. In the past, G.M. used to consider Ford and Chrysler its principal competitors. In those conditions, the No. 1 United States auto manufacturer had anti-trust reasons for keeping the second and third companies alive and at least fairly well; in fact, G.M. never pushed its share of the United States market much above fifty per cent. Now G.M. worries more about the Japanese and European auto makers than about Ford or Chrysler. G.M.'s share of the domestic market has been over sixty per cent for more than a year. It has grown throughout the recent slump in car sales. Because of the anti-trust implications, G.M. officials are not exactly forthcoming on the subject, but the vehemence of their refusal to talk has declined in a way that suggests that the need to compete against European and Japanese manufacturers has reduced G.M.'s inhibitions about crushing Ford and Chrysler. Gerstenberg, for example, rejected outright a suggestion of mine that in the past G.M. had deliberately held back in competing with Ford and Chrysler in order to avoid anti-trust troubles. "Anybody who said that didn't know what he was talking about," he told me. Murphy seems much less worried about the matter. His view is that "if we're obeying the law, doing the best job of serving the customer, and discharging all the other responsibilities we have as a good employer and responsible citizen, then we've earned whatever we get." Among younger executives, there is not even Murphy's elaborate caveat about responsible citizenship. David Collier—the executive who chaired G.M.'s energy task force back in 1972, and who now, at the age of fifty, serves as vice-president of the financial group, directly under Roger Smith—does not even tend to view G.M. in relation to Ford and Chrysler. "There's no such thing as a domestic industry," he told me. "There's no such thing as a domestic market. There's an international market and an international set of manufacturers. I think the media should quit talking about the Big Three and start talking about the Big Eight—Volkswagen, Toyota, Nissan, Renault, and Fiat as well as G.M., Ford, and Chrysler."

The full sweep of the downsizing decision finds expression in that context. The Europeans and the Japanese are coming here not only with imports but with manufacturing plants—Volkswagen and Honda, to name two. G.M. is now going abroad in force. What is shaping up is a worldwide competition among major manufacturers. Out of that rivalry there will probably emerge half a dozen dominant firms. G.M. will almost certainly be among them. Ford probably will be, too. Others, perhaps including Chrysler, are likely to assume positions as secondary manufacturers of specialty products. A new burst of innovation—particularly in fuel economy—seems sure. Thus, there is at least a chance that the bitter competition and the turbulent markets of the past few years will have a benign outcome.

It can even be said that, with a strong prod from government, the American auto industry has turned a corner—moved from a domestic into an international market, and developed, through the experience, a new and more socially conscious management. Still, the cost of the change has been enormous. The dramatic ups downs of the auto industry has, as usual, plagued the whole American economy. Cities like Detroit have been blighted, firms sent to the wall, dealers and other associated enterprises forced out of business. Moreover, though one corner may have been turned, there is no telling when another major adjustment will come due, or how accommodation can be achieved without horrendous strain. Certainly G.M. does not know, and it knows it doesn’t know. Among the souvenirs in Murphy's office is a "Peanuts" cartoon strip, autographed by Charles Schultz. The first panel shows Snoopy standing in the outfield, snoozing, with an alarm clock on the grass beside him. The second panel shows the clock ringing. The third shows Snoopy catching a fly ball in his mouth. The fourth shows Charlie Brown on the mound asking, "How do you set the alarm for a fly ball?" ♦